On March 27, 2020, Congress enacted an unprecedented $2 trillion stimulus package, called the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), aimed at assisting people, states, and businesses nationwide devastated by the coronavirus pandemic.
As part of the CARES Act, the U.S. Small Business Administration (SBA) has been authorized to issue special loans to employers in need of financial assistance. Nearly $350 billion has been dedicated to preventing layoffs and business closures while workers have to stay home during the outbreak. On March 19, 2020, at the request of Governor Roy Cooper, the SBA approved a disaster declaration for eligible businesses across North Carolina that have been adversely affected by the spread of the coronavirus.
Eligible businesses include all businesses, including 501(c)(3) non-profits, 501(c)(19) Veterans organizations, Tribal concerns, sole proprietorships, self-employed individuals, and independent contractors, with 500 or fewer employees, or no greater than the number of employees set by the SBA as the size standard for certain industries.
Specifically, the SBA has been authorized to approve loans which are designed to provide businesses with three primary forms of relief:
1) SBA Paycheck Protection Program
Under the Paycheck Protection Program (“PPP”), businesses with 500 or fewer employees per location are eligible to receive up to 8 weeks of cash flow assistance through this federal loan that is fully guaranteed by the SBA. Notably, if the employer receiving the loan maintains payroll and does not terminate employees, the portion of the loan used to meet payroll, mortgage obligations, rent, and utilities will be completely forgiven. This critical aspect encourages business to retain worker and applies retroactively to February 15, 2020, to encourage employers to bring workers who may have already been laid off back onto the payroll.
The maximum amount available to each borrower is equal to the lesser of: (a) $10 million, or (b) 2.5x its average total monthly payroll costs, as defined in the CARES Act. Unlike most typical SBA loans, these loans are unsecured loans requiring no collateral, no personal guarantee, and no showing that credit is unavailable elsewhere. To the extent not forgiven, the loan has a maximum 10-year term and the interest rate may not exceed 4%. The Act further details eligibility for loan forgiveness.
Applications can be made through private-sector financial institutions participating in the SBA program. SBA Lenders Serving North Carolina Small Businesses can be found here.
2) SBA Economic Injury Disaster Loan Program
Business of all sizes suffering substantial economic injury are eligible to receive this low-interest federal disaster loan. The Economic Injury Disaster Loans (“EIDL”) under the CARES Act are based on a company’s actual economic injury determined by the SBA up to $2 million. These loans may be used for payroll and other costs as well as to cover increased costs due to supply chain interruption, to pay obligations that cannot be met due to revenue loss, and for other business-related uses. The interest rates associated with EIDL loans is 3.75% fixed for small businesses and 2.75% for 501(c)(3) non-profits. Additionally, the EIDL loans have up to a 30-year term, determined on a case-by-case basis, based on the borrower’s ability to repay.
Unlike the PPP, the EIDL loans do not provide for loan forgiveness. However, borrowers who have already applied for or received EIDLs due to economic injury related to the coronavirus may refinance if eligible under the PPP.
EIDL loans do not require personal guarantees for loans up to $200,000, but do require personal guarantees by owners for loans in excess of that amount. Borrowers are not required to demonstrate inability to obtain credit elsewhere. However, the SBA may require collateral on EIDL loans over $25,000, and, in processing a borrower’s application, the SBA must make a determination that the applicant has the ability to repay the loan.
Applications for EIDL loans should be submitted directly to the SBA, found here.
3) Existing SBA Loan Relief
In addition to the loan programs above, the SBA is required to meet all principle, interest, and fee payments on preexisting SBA loans for the next six months. This requirement includes all loans participating in the SBA 7(a), Community Advantage, 504, and Microloan programs.
Anderson Jones attorneys assist small business owners on a variety of matters. If you have a question regarding this topic or any other business matter, please contact Anderson Jones Attorneys Todd Jones or Keith Boyette by email or phone at (919) 277-2541.